Market will benefit from loose credit: Moody's
Chinese yuan-denominated bond issuers in the onshore market will benefit this year from a relaxed credit environment, ratings agency Moody's Investors Service said Wednesday, while cautioning that more default cases may take place in sectors burdened with overcapacity.
Recent stimulus measures from the Chinese government suggest growth and stability are the policy priorities in 2016, Moody's said in a report released Wednesday.
In January, Chinese banks issued 2.51 trillion yuan ($384 billion) worth of new yuan-denominated loans, much higher than previous expectations and setting a new monthly record, figures from the People's Bank of China (PBC) showed on February 16.
"Although the PBC has had to adapt its monetary policy management in response to ongoing yuan depreciation and capital outflow pressures, it is still managing to ensure sufficient liquidity at home," UBS said in a statement sent to the Global Times on Wednesday.
"This is why although depreciation pressure will likely be around for a while, we don't expect it to significantly compromise the PBC's ability to provide adequate credit policy easing."
The UBS statement also estimated that the PBC will deliver two additional benchmark interest rate cuts this year to rein in financing costs, given that the economy is still slowing and facing rising deflationary pressures.
Against such a backdrop, a low interest rate environment will skew yuan-denominated bond issuance toward the onshore market as domestic issuers' borrowing costs are now much lower onshore than in the offshore market, Ivan Chung, an associate managing director of Moody's and head of Greater China Credit Research and Analysis, said Wednesday at a press conference for the report's release in Shanghai.
Meanwhile, issuance of offshore yuan-denominated bonds, also known as dim sum bonds, by Chinese issuers has shrunk significantly since the fourth quarter of 2015, Chung noted.
China's dim sum market, which opened in Hong Kong in 2007, used to be appealing to Chinese bond issuers due to the r low issuance rates, as investors were betting on yuan appreciation.
Nevertheless, dim sum bond issuance by foreign issuers, which accounted for almost half of the offshore yuan bond issuance in 2015, will maintain steady growth this year, Chung said.
Despite the existence of "panda" bonds, which can be issued by non-Chinese issuers in China's onshore market, it is still difficult for foreign issuers to switch to the onshore market, he noted.
"Also, with the increasing yuan internationalization, more and more countries and regions will turn to the dim sum bond market to get the Chinese currency for their trade needs," Chung said.
More defaults likely
In 2015, new onshore bond issuance reached a record level of 24.3 trillion yuan, double the issuance volume for 2014, Moody's said, citing data from financial information provider Wind.
While issuance in the onshore bond market is expected to continue its strong momentum this year, Moody's cautioned that weak issuers in sectors with overcapacity are still vulnerable.
As there are no signs of a significant rebound in areas such as coal mining and steel, more default cases in these sectors can be expected in 2016, the ratings agency said. But Moody's also said it doesn't expect any large-scale defaults that could undermine issuance and trade of onshore bonds.
"The number of default cases in China's onshore bond market may increase to a dozen or so this year," Chung said, but there is "no need to be too concerned" about the defaults.
"We believe if any default could cause systemic risks or contagion in the credit market, the Chinese government will provide support to rescue the issuers," Chung noted.
After the first-ever domestic bond default in 2014, China recorded another seven bond default cases in 2015, even including some State-owned enterprises (SOEs) such as Baoding Tianwei Group Co and Sinosteel Co.
In April 2015, Baoding Tianwei failed to pay 85.5 million yuan in bond interest, becoming the first SOE to default on a bond in the onshore market. The company later filed for bankruptcy in October 2015.
These companies' defaults had a limited impact on employment and the economy, which is why the government didn't step in to bail them out, Chung said, noting that last year's cases also showed there was no market panic about such defaults.
